Posts filed under “Music”

DVD Sales Cannibalizing CD Sales


CD? No, DVD!

Yet another explanation as to why CD sales have been slumping over the past 3 years: DVDs.

It’s pretty obvious to any intelligent consumer that CDs are a lousy deal. For your $18 suggested retail price, you get about 45 minutes of pre-recorded music. Sometimes, you even get more than a page of liner notes. It comes in a cheap jewel case which is all but certain to break eventually.

But that’s pretty much it.

Now compare CDs with DVDs. For about the same amount of money — and often less — a DVD delivers:

• Two hour+ feature of audio AND video;
• gorgeous video quality;
• An informative booklet and/or decorative case;
• pristine audio;
• Extra features, outakes, deleted scenes, “making of the film” documentaries, interviews with director, actors, writers.

So for your entertainment dollar, what delivers more bang for the buck, the CD or DVD? The answer is obvious. There’s even a DVD price search comparison engine to facilitate consumers hunting for the best prices.

Of course, this issue is directly traceable back to the industry’s stubborn refusal to allow the free market to set prices. In that event, CDs would not only have to be competitive with each other, but with competing media, including video games and DVDs.

The trend of substituting DVDs for CDs started some time ago. Where its really visible is in the home collector market. A recent N.Y. Times article describes the rise of the mega-collector — DVD consumers whose collections of the shiny discs number in the 100s and sometimes 1,000s:

“According to Adams Media Research, consumers spent $14.4 billion last year on movies for the home, almost $5 billion more than they spent on theater tickets or video rentals. With more than 27,000 DVD movies to choose from, mega-collectors are building libraries of 1,000 titles or more, and some are starting Web sites and Internet databases to help fellow fans manage inventory. On the heels of the software is new hardware, including 300- and 400-disc DVD changers. If they ever catch on, they may prove to be the key to organizing so many shiny silver discs.

“Nobody saw this coming,” said Jan Saxton, Adams vice president and media analyst, who attributes the boom to several factors, from the low prices of DVD players to the higher quality of video and sound on the discs. “No one anticipated how much consumers would feel the pull of the $9.99-to-$14.99 impulse buy at Wal-Mart. They didn’t anticipate how ready the American consumer was to collect films.”

Alex Rosten of Los Angeles, with a collection of 542 DVD’s, said that for him, it is economics. “When I rent a DVD, it costs around $4,” he said. “Add to that the inevitable late fees and the hassle of having to return it, and I’m looking at a lot more than I bargained for. Most DVD’s cost $10 to $20, so it makes more sense for me to purchase. And I have the option of watching it whenever I want.”

The average price of a new release on DVD is $21.85, although if you know where to shop, it will be cheaper. The sale-rack titles, those older movies referred to in the business as “catalog releases,” generally cost about $12. “As an option, it often compares favorably to renting,” Ms. Saxton said. “Of course, there are movies you really don’t want to own – that’s why we don’t see the rental market fading away.”

It should be pretty obvious to anyone looking at the numbers: a healthy portion of the $14.4 billion dollars that U.S. consumers spent on DVDs in 2003 cannabilized sales which other wise might have gone to CDs. There’s simply no other intelligent way to look at it.

This is another example of the negative economic effects which are a result of the price restraints the music industry has created. Instead of letting the free market determine retail prices, inevitably driving them down, the industry has tried to artificially maintain high prices. This created an opening for any compelling product priced in the same range.

The “central planners” of the music failed to recognize that their oligopoly was not impervious to normal economic pressures. Enter the DVD player: They have achieved an incredible penetration into U.S. homes, faster than TVs, PCs, VCRs, CD players, or mobile phones. The music price fixers failed to foresee the rapid embrace of DVD players by consumers.

So now, the music industry is reaping what it sowed by forcing CD prices to stay high. Their poor planning created an opening at the price point CDS were attempting to occupy — about $14-18 dollars — for a competitive product.

Given all this, its no surprise that DVDs have been cannibalizing CD sales. It is simply yet another self inflicted wound cause by the illegal price fixing and non competitive behavior. True to its long history, the industry remains its own worst enemy.

DVD’s? I Don’t Rent. I Own.
New York Times, February 26, 2004

DVD Price Search


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CD Sales Rise as Economy Recovers

The economy slows, CD sales slow.

The economy recovers, CD sales recover.

If I am going too fast for you with this complex and sophisticated economic argument, please let me know. I can’t make this explanation any simpler, but perhaps I can find some crayons or blocks for you to play with.

The simple truism above is well known to everyone outside of the music industry. For unknown reasons, the music industry and the RIAA act as if they are exempt from the business cycle. Most sectors of the economy suffer during recessions — the exceptions are “interest-rate sensitive” groups, like Autos, Home, and Durable Goods, which benefit from the falling rates which usually accompany economic slow downs.

As we have been discussing for quite sometime now, sales of discretionary entertainment products like CDs are not an exception.

Despite the high, illegally price-fixed costs of a CD, you don’t yet need to take out a mortgage to buy one. So there is simply no reason to believe that CD sales have ever benefited from a broader economic slowdown. Yet judging strictly from the public statements of the recording industry over the past 3 years, one would never have even known that a post tech-bubble recession happened from 2000-2003. They simply never mention it. The New York Times, in an article about the continued uptick in music sales (“CD Sales Rise, but Industry Is Still Wary“), never reaches the issue of the economic weakness during the past three years.

As the economy weakened, so have CD sales:

Annual CD sales
Source: New York Times

Not surprisingly, industry sales are running parallel to the broader economy.

Indeed, in the aftermath of the world’s greatest speculative bubble, during a recession and a bear market which saw the Nasdaq lose 80% of its value, the sector only saw a 12% drop in sales during the same period. Its hard to undestand why music executives are wringing their hands over this; Most businesses would have been thrilled with “only” seeing their business off by 12% during this period.

Since then, we have seen an improving economy. Although consumer confidence remains shaky — mostly due to anemic job growth — we have seen a general improvement in spending. This has been especially true in the second half of 2003, as the hottest part of the Iraq war passed.

As the economy continued to gather strength, sales of CDs recovered. The last quarter of 2003 saw a marked marked uptick in total album sales.

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